Supply Chain Reaction
Four years ago, if you had asked people in the transportation industry about their logistics, you would have been greeted with blank stares. Times are changing, though, and now even the word "logistics" seems to be out of fashion. "Supply chain management" has taken over.
The flurry of supply chain management consulting and outsourcing companies coming out of the United States is steadily growing. From none in 1994, at least a dozen have established subsidiaries in Mexico, ready to profit from this now-blossoming market with new logistical services not previously available.
Most of these companies have one thing in common: They follow their traditional U.S. transnational customers, currently the biggest users of the supply-chain concept as implemented by third-party logistics services. The Mexican company market is eyed as something for the future, as few domestic companies understand, or venture to explore, the benefits of going outside.
Outsourcing enterprises differ in size as well as in the variety of services they offer, which may range from "flow-through" planning of parts for assembly, all the way to hands-on distribution of goods.
A lure for these companies is the fact that, nowadays, individual firms are demanding custom-fit supply-and-distribution chain management, a service logistics companies entering this now booming market are willing to provide.
The novelty now in this growing market is that there is competition, something which did not exist in the recent past. And as large companies opt for outsourcing, bids and competition for contracts get tougher.
In fact, in the latest bit of trade gossip, Ford Motor Company decided in June to outsource its Mexico-bound materials and opened up to bids for third-party logistics services. War was on. Several of the giants in the field went for the Ford contract but as in all battles, there were casualties and a winner.
Ford awarded Penske Logistics, a highly reputable U.S.-based transportation company, the contract to manage its central Mexico-bound supply chain. Penske will move the US$80 million worth in parts and goods that Ford is now delivering by itself via rail and trucks. The contract-which does not include the Ford Hermosillo maquiladora operation--translates into a daily average of 129 trucks and 12 railcars of varied cargo.
"Our investment in technology, our quality culture and our history of strong performance in the automotive industry will enable Penske Logistics to offer Ford significant improvements in its core business objectives related to the supply chain," says Mark Skoda, executive vice president for Penske.
Not only will Penske function as a carrier, but it will help Ford reduce inventory in transit and on-site at its two Valley of Mexico plants, as well as streamline pickups from more than 600 suppliers through North America. Penske will perform "make bulk/break bulk" operations, that is, consolidating parts for export on the U.S. side of the border and distributing the imported goods and parts to corresponding company departments, thus optimizing load efficiency and reducing Ford's costs.
Track record
Like many of the third party logistics suppliers now entering Mexico, Penske already has a reputation for efficiency in the United States, where it services six Ford plants. A subsidiary of the $1.9 billion dollar a year operation Penske Truck Leasing, Penske Logistics has its roots in the carrier industry. Penske Truck Leasing in turn is a subsidiary of GE Capital Services, a global diversified financial services company with assets that are over US$250 billion, and 28 specialized businesses in operation.
Though Penske is celebrating its newly won contract, the news was ill-received by the unsuccessful bidders. At least one logistics company fired its Mexico CEO for losing the Ford contract.
Penske is but one type of company joining the Mexican market. As the new third-party outsourcing service suppliers are vying for contracts, transnationals are going back to their own logistics consultants in the United States, bringing them along for the ride in their Mexican manufacturing ventures. Several cases illustrate this trend.
Guadalajara-based Philips Consumer Communications (PCC) hired Redwood Systems one year ago to perform its logistics operations. After the trial period, Redwood had a US$30 million agreement, and opted to establish a state-of-the-art warehousing facility. Redwood Systems is now in the process of filling 400 positions at its warehouse, 200 of which will be devoted to PCC, with the rest to compete in the nearly wide open Central and South American markets.
Philips is a large manufacturing company with a varied array of sophisticated electronic products such as digital and analog phones, video phones, pagers and related wireless products. In contracting Redwood Systems, it can count on complete supply-and-demand-chain logistics management services, including dedicated contract warehousing.
"The cost savings and improved services demonstrate the logistics system is operating as planned," says David Taylor, vice president of Logistics for the Americas for PCC. "Expanding our agreement with Redwood Systems makes sense over the long haul." As with other large third-party operations, Redwood Systems is also a subsidiary of a trucking company, in this case, Consolidated Freightways Corporation.
Getting into Mexico's logistics scene can also mean getting down to basics. Just ask Bill Goodwin, vice president of Wesco Distribution International Operations. Goodwin has had to implement a five-year plan that hinges not only on its long-term distribution contract with Rockwell Automation de México but extends as far as logistics training programs.
Wesco has just established a 33,000 square-foot facility in Tlalnepantla, just north of Mexico City, and it has devoted 6,000 square feet of space for offices and a training facility. "Our strong and growing partnership with Rockwell Automation has enabled us to enter this high-potential market with a solid customer base," says Goodwin. "Wesco is making a major commitment of resources to become a significant factor in Mexican industry during the next few years."
Wesco is not after the general merchandise market; it's carved a niche within electrical and industrial product distribution, giving it a profound understanding of the market. Headquarters are based in Pittsburgh, and it boasts 325 full-service branches throughout North America, with the Tlalnepantla facility being one of its latest acquisitions. Sales for 1997 were $2.6 billion.
Top players
Some of the first comers to the logistics services market in Mexico are just now beginning to reap the benefits of countless hours spent laying the groundwork over the past few years.
Logistical services and transportation capabilities had been going hand-in-hand until the "supply-chain management" concept was developed just a few years ago. Since then the term "logistics," no matter how fashionable it is among Mexican executives, is now somewhat passé. Within the overall supply chain concept, third-party suppliers are changing their notions of service too, implementing a fully operational package to old and new customers.
The first of the logistics consulting companies to enter Mexico was no doubt the San Francisco-based Kingsley Group Latino America, which with only five years in the country is by far the oldest of the firms.
Kingsley came into Mexico as a consultant specializing in air, rail and sea transport. Over the past 10 years it has perhaps been the foremost promoter of the cross-border transport idea, and it has done its share to unite carriers from both sides of the U.S.-Mexico border. Kingsley's now-traditional Transporte Internacional yearly show is in its tenth year, drawing an average of 300 representatives in the carrier business.
Kingsley's true business, however, is consulting, and its outlook of the market is also changing. "We've restructured since last year with the idea of covering not just the Mexican market, but to move on to Central and South America," says Kingsley Group Mexico Director Juan Carlos Villa. "The areas we are covering now are transportation and logistics, where we try to supply the consulting service for the entire supply chain. We do studies and diagnose on detailed distribution operations." For some time, Kingsley was well-known for developing logistics oriented software, but now it's bringing in software from assorted suppliers.
Like other logisticians, Villa is keenly aware of the sensitivity of the Mexican market. "Mexicans are slowly touching base with the idea of supply-chain management," he says. "We feel it is a kind of education that still needs some learning on the part of high-level executives. When we try to sell our services, they think we're selling software. But at least the large national companies are beginning to see that this concept yields benefits."
Another "veteran" consulting firm in Mexico is A.T. Kearney, a subsidiary of EDS. Entering the market just before the 1994 crisis, it managed to survive the economic lashing, and within three and a half years made back its initial investment, says company Vice President Lionel F. Lopez. "But it was the result of a lot of work for important companies," Lopez adds.
Like Kingsley, A.T. Kearney won't reveal its client list, but it makes no secret that it is out to fulfill the needs of transnational companies involved in global distribution.
A.T. Kearney is now putting together what is being labeled as Mexico's most ambitious logistics database. The project is being organized by Roberto Rojas, who is also in charge of headhunting services for the company. As part of its consulting and implementation package, A.T. Kearney locates competent, educated personnel to carry out the supply chain programs.
Companies are beginning to realize that warehousing site location is an increasingly important part of the supply chain. James Schneider, realty and industrial property vice president of the Alles Group, puts it bluntly: "Look, any housewife can go out and find an empty space to use as a warehouse. But does it fullfill your distribution needs? Is it conveniently located? Does it have the infrastructure to warehouse your product?"
Schneider runs down another hundred criteria a well-equipped, well-located assembly, warehousing or manufacturing site must address to meet the specific needs of the customer's marketplace, including soil quality, level of construction supervision, and proper budget execution.
Up until now, realty services have not been included in the supply chain, but for startup or expanding companies this turnkey service could prove essential in establishing a logistics mode right from the start.
Alles Group now maintains offices in Mexico City, Monterrey and Guadalajara.
New image
Hands-on services companies have also appeared on the scene, supplying related logistics services to both U.S. and Mexican companies doing business in Mexico.
Though UPS is a household name, the UPS Worldwide Logistics Group has nothing to do with the courier service you're familiar with. It is a separate cargo distribution branch, and it is indeed UPS's way of resolving its conflict with Mexican carriers two years ago, when it tried to join the full-truckload market in Mexico. UPS was banned by both the National Chamber of Cargo Transportation (Cámara Nacional de la Autotranporte de Carga, Canacar) and the Communications and Transport Secretariat (Secretaría de Comunicaciones y Transportes, SCT). "This is our way around it," says John Felix Maldonado, managing director for UPS Worldwide Logistics in Latin America.
The company has established a warehouse in the Cuautitlan Izcalli area right next door to the Ford plant, and it is now providing direct distribution for customers such as Office Max and dairy product manufacturer Parmalat. The custom fit service conforms to customer taste. For instance, the ebullient Office Max likes its distribution trucks colorful and forgoes the UPS Worldwide Logistics logo so as to play up its own fleet.
Parmalat, on the other hand, does not shy away from having the service provider logo on the side. "We're the milkman now," jokes Maldonado, who never thought he'd be a dairy product distributor.
Distribution for these two customers and others is mostly confined to the Mexico City metropolitan area.
One of the latest companies to arrive on the scene is Cargo Options, promoting itself as "your ultimate resource for global transportation and logistics solutions."
Lured by the privatization of the northeastern railroad now known as Transportación Ferroviaria Mexicana, Cargo Options has come to tap the Mexican market with integrated services.
"The Mexican market is growing for all," says Eduardo Johnson, manager of the Mexican operation. "The mentality of Mexican exporters is becoming more competitive, and cost-effectiveness in transportation is a must."
Cargo Options offers door-to-door service to customers, but has no warehouses nor facilities along the way. Its forte is the use of transport routes in the intermodal markets. As a Mark VII subsidiary, Cargo Options ensures that containerized intermodal cargo gets from point of origin to point of delivery. Virtually starting out, it is handling 25 containers a week, and competing versus other companies offering similar service.
"There is competition now in this market, but clients are benefiting from it as cargo fees get lower," says Johnson.
Mexican movers
Arturo Frias is a man for all seasons in the development of logistics and supply chain management knowledge in Mexico. He first got hooked on logistics when he worked at Kodak, and would later go on to organize materials handling, traffic, transportation and distribution for major corporations. He was the founding president of the first Traffic and Distribution Association, which eventually became the Logistics, Distribution and Traffic Association (Asociación de Ejecutivos en Logística, Distribución y Tráfico, ASELDYT), now presided over by Carlos Medina, customer service manager for MultiPack delivery service. Frias is also a member of the Mexican Chapter of the Chicago-based Council of Logistics Management.
Now Frias has established his own business, Innovative Logistics, marking a trend we're bound to see more of in the future: Mexican companies competing with their U.S. counterparts.
"Logistics is the key to success in the new millenium," is the catchphrase of his company, which is currently in the process of seeking customers for its consulting services. "We have seen a tremendous development of the logistics movement just in the last year," Frias says about the new companies sprouting up all over the place.
One of the key problems to address, he says, is the lack of qualified personnel to implement logistics systems. "A system is worth nothing if the right people do not come with it," Frias says. Consequently, his company is going into headhunting with the specific aim of servicing this growing and demanding market.
Beyond his own business, Frias has been a guiding influence for many, including Fabian Delgado Pimentel, who for the third time this year is staging the trade show Expologistica, which brings together over 250 logistics services suppliers on one floor. This year the show will be staged July 7 to 9 in Mexico City.
The trade show gives an idea of the mixture of supply chain needs, from traditional road carriers all the way to satellite tracking systems, without bypassing warehousing and materials handling instruments, such as pallets, lifts and bar coding. Perhaps Expologistica is the best gauge of the growth of the supply chain movement in Mexico. The first show had about 120 companies interested in participating, less than half the number of this year's group, indicating truly explosive development in a field that was almost unheard of in Mexico just five years ago.